Konza Capital Newsletter #3
A relatively calm start to H2 2022, but is it the calm before the storm?
Settling Down in Crypto, Heating up in Europe
It seems that after two weeks of absolute fireworks in crypto land, things have started to calm down slightly. The market has edged up a little, with BTC rebounding from last weeks low of $19K and hovering around $21K at the time of writing Friday morning. We may be reaching the denouement of the Three Arrows Capital fallout, as no new market participants have hit the headlines due to bad loans to the now defunct asset manager. To conclude the debacle that was Three Arrows Capital here is just a shortlist of some events that have transpired since they became insolvent:
Voyager Digital files Chapter 11 Bankruptcy and freezes transfers and withdrawals
BlockFi strikes deal with FTX to be purchased for up to $240 million based on performance triggers - this is over a 90% correction from their former $3 billion valuation for their Series D
Institutional prime broker Genesis Trading has hundreds of millions of loans that may not be repaid due to 3AC entanglement
While other participants such as Celsius and Babel Finance also had bad books to the tune of hundreds of millions the attribution and finger pointing is yet unresolved for these parties. Perhaps more interestingly this past week, Europe has turned into a hotbed for bad news:
Euro zone inflation hits 8.6% and ECB plans first rate hike in 11 years
UK Prime Minister Boris Johnson resigns
Germany logs first negative trade deficit in over 30 years amid rising import costs
Euro to USD almost reaches parity this week, hitting lows not seen since the early 2000’s.
In Other News
Celsius repays $183M loan on DeFi protocol Maker, regaining access to locked collateral. This is one of the few signals that may give Celsius investors hope that they may yet have their funds unlocked.
Crypto investor and fierce bitcoin mining advocate Nic Carter responds to backlash by Bitcoin maximalists who were disappointed in his interest in other projects.
EU clears the path for labeling Natural Gas and Nuclear as green investments, opening the road for further funding.
Mining Metrics
“Be fearful when others are greedy, and greedy when others are fearful.”
- Warren Buffett
Bitcoin Price: ~$21,000
Hashrate (amount of computing power used by the Bitcoin network): 212EH/s
Hashprice (expected value of 1 TH/s of mining power per day): ~$0.09
ASIC Prices (the computing machines used to mine BTC): $44.73/TH
Miner, miner, on the wall, whose business model is the most resilient of them all?
Coming off the back of another week where ASIC prices precipitously fell, it has become clear that not every public Bitcoin miner is going to survive the coming months. Winter has come, and the leverage employed by many of the market participants is going to continue forcing them to behave in ways that are counterproductive to not only Bitcoin’s price, but also their own business success. Bitcoin balance sheets for some publicly traded miners such as Core Scientific and Bitfarms have dropped anywhere from 40 to 60% at the time of writing in order to pay for things like operations and upcoming ASIC orders. Highly levered balance sheets have put enormous selling pressure on the market and secondary market orders for Bitcoin miners have continued their descent, making for one of the most attractive entry points to date. What remains unclear is which business models will prove to be the most resilient and capable to expand into the coming cycle. Will it be Marathon who does not own any of their infrastructure? Will it be Riot which has a hybrid model of hosting, self-mining, and some vertical integration? Perhaps it will be a miner like Iris Energy who has stayed ahead of negative narratives around BTC mining and generated most of their BTC through renewables? Only time will tell whose model will work best, but one thing can be for certain: This market shakeout is showing us that the financial savviness of many of these companies must be improved if they are to continue growing. If Bitcoin truly does operate more like a commodity, then increased financialization of this market is going to enable the most astute operators to more effectively hedge whatever exposures they have in the market.